If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of Lian Hong Art (GTSM:6755) we really liked what we saw.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Lian Hong Art:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.26 = NT$213m ÷ (NT$2.0b - NT$1.2b) (Based on the trailing twelve months to June 2020).
So, Lian Hong Art has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 3.6% earned by companies in a similar industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Lian Hong Art's ROCE against it's prior returns. If you'd like to look at how Lian Hong Art has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Lian Hong Art Tell Us?
Investors would be pleased with what's happening at Lian Hong Art. Over the last three years, returns on capital employed have risen substantially to 26%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 68%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
Another thing to note, Lian Hong Art has a high ratio of current liabilities to total assets of 61%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
All in all, it's terrific to see that Lian Hong Art is reaping the rewards from prior investments and is growing its capital base. And a remarkable 188% total return over the last year tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Lian Hong Art can keep these trends up, it could have a bright future ahead.
If you want to continue researching Lian Hong Art, you might be interested to know about the 2 warning signs that our analysis has discovered.
Lian Hong Art is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.
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